Author Topic: Invest or pay off debt  (Read 2820 times)

ingrownstudentloans

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Invest or pay off debt
« on: December 15, 2013, 08:42:15 AM »
100K in student loan debt.  Monthly minimum payment of $1000.  All loans have variable rates. Rates are as follows 70K at 2.92%, 16K at 3.0% and 14K at 3.5% (just refinanced the 70K down from 6.8%!).  I had been throwing $2000 a month at the student loans to pay off the stupid high rate of 6.8, but now that it is about 3.2%.  I was planning on increasing my monthly payments by the entire amount of my raise, expected to be about $500 extra each month.   

This means that I have about $1,500/month that I need to find a home for.  Do I continue to work away at the student loans and become debt free by my 30th birthday, or do I save it looking for higher returns elsewhere?

Single,
gross income (job/bonus/rental income) of ~ 95k,
7% contributions to 401k,
emergency fund ~ 5k,
no cc debt,

I think I know what your answer is going to be, and I just want to confirm that I am doing the right thing.

Thanks all.

engineerjourney

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Re: Invest or pay off debt
« Reply #1 on: December 15, 2013, 10:00:43 AM »
100K in student loan debt.  Monthly minimum payment of $1000.  All loans have variable rates. Rates are as follows 70K at 2.92%, 16K

Even though they are low now I would lean towards aggressively paying them off because they are variable.  It would be awful to just pay the minimum and get stuck in a couple years with much higher rates.  Definitely contribute to your 401K to at least get the match and maybe try to split the new extra $500/month between the loan payments and upping 401K contributions?  You are in a high tax bracket so I would definitely try to contribute more to the 401K if possible (not sure what you are contributing).  The student loan interest isnt deductible at that income either so there is no 'advantage' of keeping them around.  And as others say in this forum a lot, you can't get rid of student loans through things like bankruptcy!  If you could fix some of those rates though I could make a better argument towards not aggressively paying them off. 

turboseize

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Re: Invest or pay off debt
« Reply #2 on: December 16, 2013, 04:12:21 AM »
I'd kill at least the 3.5% loan - that should be done in just a few months and should free up some additinal cash flow.

Then start investing - and treat your loans as bond part of your portfolio. So, depending on how risk averse you are, perhaps 60% stocks, 40% extra debt payments.

But that's just a compromise. The one I personally would take, but you mght be different. That depends on you rpersonal risk tolerance... Investing everything in stocks should give greater returns, but leaves you with higher risk. Killing your debt ASAP reduces risk considerably, but you miss out on stock market returns... So it just boils down to: how do you feel about risk?

aj_yooper

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Re: Invest or pay off debt
« Reply #3 on: December 16, 2013, 07:12:11 AM »
Your income is very good, especially for your age.  Your SL debt is high and possibly increasing interest rates create uncertainty and risk and limit your saving and investing options.  While it is critical to chunk money into retirement accounts when you are younger, too much of that would mean you remain in a compromising debt/interest rate risk state.  Your SL is a loan and brake on your human capital and leads to your current negative financial net worth; the longer it stays, the more time you'll have with less investment return on your total capital (human and financial). 

I would put $ into the 401k, sufficient to capture any match, but focus on the sticky, risky debt.  Your current 7% towards the 401k seems reasonable, but go hell bent on paying off the loans.  Reduce your expenses, don't buy stuff.  Then you can really roll. 

ingrownstudentloans

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Re: Invest or pay off debt
« Reply #4 on: December 16, 2013, 07:13:11 AM »
Definitely contribute to your 401K to at least get the match

Unfortunately, no match at my employer :(

Even though they are low now I would lean towards aggressively paying them off because they are variable.  It would be awful to just pay the minimum and get stuck in a couple years with much higher rates. 

Agreed, that I want to keep paying more than the minimum.  Even though the rates are variable, they are capped (8.5%), and I just don't see rates rising significantly in the next 3-4 years (though I think they need to to get out of this global slump we are in).

Then start investing - and treat your loans as bond part of your portfolio. So, depending on how risk averse you are, perhaps 60% stocks, 40% extra debt payments.

Fantastic idea.  I had been thinking of splitting the extra, but I did not even consider treating it as part of the portfolio for a structured approach.  What would you do regarding rebalancing?  Normally as the stock side grows you would sell some stock and invest in bonds (and visa versa), but if my "bond investment" is going away each month, this approach would not work...any thoughts on how to reconcile the traditional investment ideas with this scenario?

Thanks guys/gals for your thoughts on this.